Risks growing that could alter ECB's tightening plan: Villeroy

Francois Villeroy de Galhau arrives at the Petruzzelli Theatre during a G7 for Financial ministers in the southern Italian city of Bari, Italy May 11, 2017. REUTERS/Alessandro Bianchi

NEW YORK (Reuters) - The European Central Bank would have to alter its march toward a more normal policy stance if growing risks from protectionism, exchange rates or market swings end up depressing inflation, ECB policymaker Francois Villeroy de Galhau said on Wednesday.

For now, he said in a New York speech, there is much agreement at the ECB to halt asset purchases in September or December and that debt problems at any country within the euro zone will not delay this gradual normalization.

But “we should pay close attention to a possible cumulative risks scenario, the likelihood of which has increased recently: an adverse loop of protectionist threats, unfavorable exchange rate movements, and abrupt financial markets corrections,” Villeroy said.

“Such a negative loop would tighten financial conditions, and deteriorate the growth outlook in the euro zone,” he told the Economic Club of New York. “Our monetary policy stance would then have to be adapted, depending on the ultimate impact on inflation prospects.”

The ECB has kept interest rates extremely low and been printing money and buying bonds with it for three years to pump cash into the financial system and help revive inflation, which in the euro zone was 1.3 percent year-on-year in March. But policymakers are now debating how to claw back that support and whether to wind down its lavish bond purchases later this year.

Villeroy’s comments reinforced concerns raised in the minutes of last month’s ECB policy meeting over a stronger euro currency and U.S. treats of tariffs that could harm international trade.